EX­CHANGE-TRADED FUNDS

There is wis­dom in in­vest­ing in hard cur­ren­cies, and diver­si­fi­ca­tion spreads the risk

Financial Mail - Investors Monthly - - Contents - STEPHEN GUN­NION fol­low Stephen on Twit­ter @stephen­gun­nion

There’s noth­ing like a steep fall in the value of the rand to sharpen one’s mind about the im­por­tance of be­ing ge­o­graph­i­cally diver­si­fied — my mind in­cluded.

And like many oth­ers, I’ve missed that boat all too of­ten.

As the rand hit new lows against the pound and the dol­lar last month, the value of hold­ing a por­tion of your in­vest­ments in a hard cur­rency be­came clearly ev­i­dent. At the time, Deutsche Bank was laud­ing the suc­cess of its db x-tracker se­ries of ETFs in the lo­cal mar­ket, hav­ing just passed R10bn in as­sets un­der man­age­ment. If you look at the per­for­mance stats, they are pretty im­pres­sive. At the end of 2014, as­sets un­der man­age­ment were at R2,5bn, so they’ve grown four­fold since then.

Sure, they’ve been helped along by the bull mar­ket of the past few years, but the rand’s steady de­cline against de­vel­oped-mar­ket cur­ren­cies has done its part in gen­er­at­ing re­turns for South African in­vestors with an off­shore fo­cus.

Not only do you get ex­po­sure to other cur­ren­cies, but off­shore diver­si­fi­ca­tion also gives you ex­po­sure to economies and mar­kets that may per­form bet­ter than our own in the fu­ture.

The DBXUS tracker, which tracks the MSCI USA in­dex, is the stand-out per­former, with a re­turn of more than 29% in the year to end July. It also leads the pack over three and five years, de­liv­er­ing 33,8% and 27,7% over those pe­ri­ods.

But you’d have done pretty well had you been in Deutsche’s MSCI Ja­pan and MSCI World funds over the past year too.

The US fund is by far the most pop­u­lar, at­tract­ing a third of the funds that are in­vested in the five global ETFs of­fered by Deutsche in SA. The DBX World is the next favourite, but the cur­rency ef­fect gets di­luted; while the ETF is dol­lar de­nom­i­nated, the un­der­ly­ing stocks trade in the cur­rency of the ex­changes they are listed on. So while the US makes up over half of this ETF, you’re also tak­ing a bet on how cur­ren­cies like the yen, the euro and ster­ling will per­form.

While the Deutsche track­ers are the only ETFs in­vested in off­shore mar­kets — for now — they are not the only game in town if you want off­shore eq­uity and cur­rency ex­po­sure.

BNP Paribas in­tro­duced a se­ries of ex­change-traded notes a year and a half ago, which etfSA’s Ne­rina Visser says pro­vide an in­ter­est­ing al­ter­na­tive for in­vestors. The BNP Paribas Guru ETNs of­fer ex­po­sure to mar­kets that in­clude Europe, Asia and the US, as well as a world ETN. They are not mar­ket-cap­i­tal­i­sa­tion weighted, so you get the in­ter­na­tional ex­po­sure us­ing smart beta. Visser sug­gests mix­ing the two in larger port­fo­lios, depend­ing on your in­vest­ment ob­jec­tives. The BNPUS has de­liv­ered al­most 10% over three months and more than 28% over a 12-month pe­riod. The BNPEur has re­turned only 2,5% over three months, but 24% over a year. You’d have lost 15% with the BNPAsi over three months, but made a pos­i­tive 10% re­turn over 12 months. Sim­i­larly, with the BNPWor, you’d have shed 2,4% of your in­vest­ment over three months, but made more than 17% over a year.

In ad­di­tion to Deutsche’s lo­cally listed ETFs, it also of­fers three ETNs that give ex­po­sure to emerg­ing mar­kets, China and Africa, though the lat­ter in­cludes a large South African com­po­nent. Hardly sur­pris­ing, then, that the MSCI EFM Africa shows neg­a­tive re­turns over the short term but that over three years you’d have achieved close to 15%.

If you don’t want to take a bet on how off­shore eq­ui­ties will per­form, but want the cur­rency ex­po­sure, another al­ter­na­tive is a cur­rency ETN of­fered by Absa Cap­i­tal. The NewWave Pound Ster­ling ETN re­turned over 10% in the three months to Septem­ber 3, while over 12 months it de­liv­ered more than 17%. Over the same three months, the NewWave US Dol­lar ETN re­turned 9%, but over 12 months a mouth­wa­ter­ing 24%.

For those who have missed the boat on those re­turns, all is not lost. Deutsche’s ETF head Wehmeyer Fer­reira re­minds us that off­shore al­lo­ca­tion is not a short-term de­ci­sion; you have to be look­ing far ahead. You will also see pe­ri­ods when the rand strength­ens against the dol­lar, euro and pound, while emerg­ing mar­ket eq­ui­ties may out­per­form de­vel­oped mar­ket stocks for pe­ri­ods. It’s about spread­ing your risks through diver­si­fi­ca­tion.

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